Wheeler Real Estate Investment Trust, Inc. quarterly report, Q3 FY2018

Wheeler Real Estate Investment Trust, Inc. — 2018 Q3 Form 10-Q

Reporting period: Quarterly and nine-month periods ended September 30, 2018. Financial statements are unaudited. The company owned and operated 65 centers, one office building and six undeveloped properties across 12 states. The portfolio totaled approximately 5.72 million square feet and was 90.0% occupied at quarter-end, compared with 92.8% a year earlier.

Key Financial Metrics

Metric	Three months ended Sept. 30	Nine months ended Sept. 30
Total revenue	$16.22 million	$49.64 million
Operating income	$4.62 million	$10.08 million
Net loss attributable to common shareholders	$3.81 million	$13.57 million
Total loss per share	$0.41	$1.48
Property NOI	$11.29 million	$35.18 million
FFO	$4.20 million	$13.71 million
AFFO	$1.27 million	$5.63 million
Cash flow from operating activities	Not separately provided	$18.54 million

Revenue increased 6.7% in the quarter and 12.2% for the nine-month period. Operating margins, calculated from reported operating income divided by revenue, were approximately 28.5% for the quarter and 20.3% for the nine months. Net losses remained significant after interest expense, depreciation and preferred dividends.

At September 30, 2018, total assets were $527.09 million, including $426.97 million of investment properties, net. Cash and cash equivalents were $3.64 million and restricted cash was $16.71 million. Total loans payable, net, were $354.09 million; principal debt outstanding before unamortized issuance costs was $371.52 million. Total equity was $59.04 million, including $74.84 million of Series D preferred stock classified as mezzanine equity.

Material Changes Versus Prior Comparable Period

• Revenue benefited from the January 2018 acquisition of JANAF, an 810,137-square-foot retail center acquired for $85.65 million. JANAF contributed approximately $2.76 million of property revenue and $1.97 million of NOI in the third quarter.
• Same-store property revenue declined to $13.37 million in the quarter and $41.53 million for the nine months, primarily due to Southeastern Grocers recaptures, rent modifications and expiring anchor leases. Same-store NOI declined to $9.32 million in the quarter and $29.52 million for the nine months.
• Ending occupancy decreased 2.8 percentage points to 90.0%, despite the portfolio growing by one property and 16.7% in gross leasable area.
• Interest expense increased 22.0% in the quarter and 15.0% for the nine months, primarily due to JANAF-related borrowings and higher LIBOR.
• Asset management fees, commissions and development income declined materially as certain related-party service agreements were terminated.
• Common dividends were suspended in 2018. Preferred dividends declared were $3.21 million for the quarter and $9.62 million for the nine months.
• The company issued Series D preferred stock in January 2018, generating $21.16 million of net proceeds.
• 2018 dispositions included the Chipotle ground lease at Conyers Crossing, the Laskin Road land parcel and Shoppes at Eagle Harbor, producing reported gains. Several additional properties and land parcels were classified as held for sale.

Cash Flow, Debt and Liquidity

• Operating cash flow was $18.54 million for the first nine months, versus $18.82 million in the prior-year period.
• Investing cash flow was negative $21.02 million, driven primarily by the $23.15 million cash component of the JANAF acquisition and capital expenditures of $3.84 million.
• Financing cash flow was positive $10.54 million, reflecting preferred stock proceeds and new borrowings, partially offset by debt repayments and distributions.
• Cash, cash equivalents and restricted cash increased to $20.35 million from $12.29 million at December 31, 2017.
• Approximately 78.8% of debt was fixed-rate and 21.2% was variable-rate. Management estimated that a 1.0% increase in rates on variable-rate debt would reduce annual cash flow by approximately $788,000.
• Scheduled principal repayments and maturities totaled $15.42 million for the remaining three months of 2018 and $80.51 million during 2019. The 2019 amount included $52.10 million outstanding under the KeyBank credit facility.
• Management expected to meet liquidity needs through cash flow, available cash, refinancing, property sales and extensions. These plans remained subject to lender commitments, documentation and customary conditions.

Outlook, Commentary, Risks and Unusual Items

The filing provides no formal earnings or revenue guidance. Management stated that it was focused on refinancing maturing debt, selling selected assets, increasing occupancy, obtaining rental rate increases and controlling operating expenses. Management also stated that the ability to refinance debt and execute asset sales would determine future liquidity and could affect the company’s ability to grow and pay dividends.

• The KeyBank facility had a $3.83 million borrowing-base overadvance as of September 30, 2018. KeyBank subsequently extended the repayment deadline to February 28, 2019. The company reported compliance with financial covenants as of September 30, 2018.
• The Revere Loan balance was $1.76 million at September 30, 2018. A November 2018 amendment extended maturity to February 1, 2019, increased the interest rate to 10% and increased the exit fee to $575,000.
• On October 22, 2018, the company sold the Monarch Bank Building and used net proceeds to reduce the Revere Loan. First National Bank approved a 24-month extension for the First National Bank and Lumber River loans.
• A $250,000 lease termination expense was recorded in July 2018. Professional fees increased due partly to KeyBanc Advisors, proxy solicitation and higher audit and legal costs.
• The $6.74 million Sea Turtle Development notes receivable remained on nonaccrual status. The company did not recognize $1.08 million of related interest income for the nine months and warned that foreclosure by the senior lender could lead to further impairment.
• Pending litigation includes claims by former CEO Jon S. Wheeler and a lawsuit by JCP Investment Partnership alleging that the company failed to maintain the required Series D preferred stock asset coverage ratio and must redeem the preferred shares. Outcomes were uncertain.
• Principal operating risks include retail tenant credit and anchor-store concentration, declining occupancy, regional economic concentration, interest-rate exposure, refinancing risk, environmental liabilities and the company’s ability to maintain REIT qualification.
• The company adopted revenue recognition Topic 606 and restricted-cash guidance in 2018 without a material reported impact. The company was evaluating the impact of the new lease standard, effective January 1, 2019.

Important Facts for Investors to Verify

• Ability to refinance or repay the $15.42 million due in the fourth quarter of 2018 and $80.51 million due in 2019.
• Resolution of the $3.83 million KeyBank borrowing-base overadvance and continued covenant compliance.
• Progress on planned sales of held-for-sale properties and the use of proceeds to reduce debt.
• Occupancy trends, anchor-tenant recaptures and the pace and economics of backfilling vacant space.
• Collectability and potential further impairment of the Sea Turtle Development notes receivable.
• Potential liability or redemption obligations arising from the Series D preferred stock litigation.
• Sustainability of preferred dividends and the suspension of common dividends, particularly in light of AFFO of only $5.63 million for the nine months.
• Impact of the January 1, 2019 lease-accounting adoption and any resulting balance-sheet changes.